What Is a Small Business Mortgage?

A small business mortgage is a type of business loan that is secured by commercial property. Lenders write both purchase loans and refinance loans for small businesses. The definition of a small business varies between countries and lenders, but generally small businesses are locally owned enterprises that often have a single owner or take the form of a partnership.

Small businesses often start as home run businesses before expanding and moving into rented commercial property. A small business mortgage enables a business owner to buy a custom made building or purchase an existing building that is well suited to the business' operational needs. The business normally has to make a down payment, and lenders often finance up to 80 percent of the purchase price.

Businesses can extract equity from an already owned building by taking out a cash out refinance small business mortgage. Borrowers can use loan proceeds for any legal purposes, but many companies use these loans to finance equipment purchases and operational expansions. These loans can also be used to payoff existing mortgages, and business owners typically refinance when interest rates are low.

A small business loan can take the form of a variable or fixed rate mortgage. Fixed rate loans normally have term times that last between 10 and 30 years. Variable rate mortgages usually begin with an interest only term that lasts five or 10 years, after which the business must make a balloon payment to cover the principal owed.

During the underwriting process of a small business mortgage, the lender examines the businesses tax returns and conducts a cash flow analysis. Lenders have to determine whether the business has sufficient operating income to afford the monthly loan payments. Start up businesses are typically unable to take out small business mortgages, and most lenders only lend to businesses that have been operating for at least two years. In some countries, government programs exist that provide commercial loans to start up businesses, although the interest rates and processing fees are often much higher than on conventional small business loans.

Lenders that write small business loans normally require the business owner to sign the loan as a guarantor. The guarantor assumes responsibility for settling the debt in the event that the business becomes insolvent. When a business has multiple owners, the lender normally requires all owners with a significant ownership stake to act as guarantors on the loan. Lenders check the guarantors' credit and require income verification to determine if the guarantor has the means to pay the loan if the business proves unable to do so. A lender can reject a loan application on the basis of the guarantor’s credit score or financial standing.